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Wall Street likely to face further pounding
US stocks could face a further pounding this week as evidence mounts that the economy has entered a recession and problems in the financial sector accelerate.
- Reuters
- Published: 00:02 March 9, 2008
New York: US stocks could face a further pounding this week as evidence mounts that the economy has entered a recession and problems in the financial sector accelerate.
This week's economic agenda is relatively light until Friday when the Consumer Price Index will command attention, especially with oil's jump last week to a record over $106 a barrel and the surge in other commodity prices.
But anxiety about inflation will take a back seat to the recession fears rippling from Wall Street to Main Street after Friday's government report showed employers cut payrolls for a second straight month.
At the same time, the financial sector has been pummelled by news showing further signs of troubles related to the subprime mortgage market.
For one, concern about the survival of Thornburg Mortgage Inc increased on Friday after the mortgage lender said it has $610 million of margin calls outstanding as of March 6, an amount exceeding its available liquidity.
The negative news trend is showing few signs of letting up, and could mean further losses for stocks.
"The sentiment right now is extremely bad," said John Praveen, chief investment strategist at Prudential International Investments Advisers LLC in Newark, New Jersey.
"On the economy side, the numbers on the labour market probably confirm the US is in a recession," he said, though he added that much uncertainty still exists on the subject.
"On the credit side, we're seeing further stress on mortgage tightening and fallout from that," Praveen said.
Stocks ended lower on Friday and notched their second straight week of losses.
The S&P 500 is now off about 17 per cent from its record closing high set back in October, a drop that puts the benchmark gauge a shade away from crossing a threshold that market technicians consider to be the onset of a bear market.
On Friday, the Dow Jones industrial average fell 146.70 points, or 1.22 per cent, to end at 11,893.69. The Standard & Poor's 500 Index slid 10.97 points, or 0.84 per cent, to 1,293.37. The Nasdaq Composite Index dropped 8.01 points, or 0.36 per cent, to 2,212.49. For the week, the Dow lost three per cent, the S&P 500 shed 2.8 per cent and the Nasdaq declined 2.6 per cent.
Hopes for rescue
If there is to be any reprieve for the stock market, it could come from signs the Federal Reserve is contemplating an emergency interest-rate cut, analysts said.
The Federal Reserve is scheduled to meet on March 18.
But last week stocks sank below levels seen on January 22, when the Fed instituted an emergency rate cut to ease credit market strains and revive the economy.
Just minutes before the release of Friday's jobs report, the Federal Reserve announced measures to address heightened liquidity pressures in term funding markets, a move the Fed's staff said was a reaction to recognition that market deterioration had accelerated recently.
"Stocks and bonds are both begging the Fed to cut at least 50 basis points, and perhaps as early as (this) week. Investor risk aversion is spreading and the Fed can see this in the price action of all asset classes," said Tom Sowanick, chief investment officer of Clearbrook Financial in Princeton, New Jersey.
This week's earnings schedule is short, but some quarterly results are expected from retailers including American Eagle Outfitters.
Many analysts have said earnings estimates are overly optimistic and need to come down, further adding to worries for stock investors, who continue to see stocks as a bargain.
As the result of an eroding earnings outlook, stocks are slightly more pricey now than they were at their previous lows on January 22, with a 12-month forward price-to-earnings ratio at 13.03 now versus 12.93 then.
"It's likely that first-quarter earnings are going to be troubling for a large number of companies," said Sasha Kostadinov, portfolio manager and research analyst at Shaker Investments in Cleveland, Ohio. "The market has some valuation support here, but the near-term fundamentals are a bit sketchy."
Another source of concern for investors is oil, which has repeatedly hit record highs.
Another worry is the dollar, which is testing record lows against the euro and multi-year lows against the yen.
On Friday, U.S. oil fell 32 cents to settle at $105.15 a barrel, but only after climbing to $106.54 - the highest level since the New York Mercantile Exchange launched crude oil futures in 1983.
While higher oil prices have helped stocks by lifting the energy sector, they remain an overall negative because they put an extra burden on consumers and businesses.
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